The economy can continue to grow at around 7 per cent a year while inflation is unlikely to slow down, according to the latest Economic Report from Davy Stockbrokers.
In a bullish view of the Republic's economy, Mr Jim O'Leary is predicting economic growth of 8.5 per cent this year and 7 per cent on average for the following four years. This is significantly higher than the 5 per cent estimate published by the ESRI last October.
He said the average rate of inflation was likely to remain above 4 per cent over the next two years. He pointed out that around half of the current rise in consumer prices could be accounted for by cigarette price increases and the rise in oil prices, while the very high rate of inflation in the services sector also contributed.
Services' inflation was running at around 6 per cent and would increase to 7 per cent, he said. The strength of sterling was having little influence on inflation.
According to Mr O'Leary, high inflation, particularly in wages, is not unambiguously bad. It serves to bring the market back into equilibrium and, at the margin, also increases labour supply, which in itself will boost growth. It is simply that wage inflation will be the mechanism whereby we gradually lose competitiveness, rather than the exchange rate which is now controlled elsewhere.
It is also possible that the unemployment rate will fall to 3 per cent from around 5 per cent.
The report also argues that while, by definition, the boom must come to an end, there is no reason why that should not be in 20 or even 30 years' time.
The history of the post-war period is full of examples of countries that have grown as fast or faster than the Irish economy but for much longer periods. The Japanese expansion started in the 1950s and, by and large, continued until the early 1990s. The post-war expansion of Europe also lasted 25 years.
According to Mr O'Leary, the rapid growth in the Irish economy could last for several decades. "By such standards, the current Irish expansion is still quite young and it is rather premature to be predicting a reversal."
He said the main reason that the economy would grow more quickly than current assumptions was that productivity would not fall off dramatically, while the labour force would go on growing.
The report also argues that the vast bulk of the house price increases of recent years is the result of falling interest rates and growth in disposable income and, thus, the bubble is small. "A spontaneous house price collapse is unlikely," Mr O'Leary said.
"However, this is based on the assumption that the supply of new houses will continue to rise steadily and slow the rate of house price increase." A rise of more than 10 per cent in either of the next two years would inflate the bubble and raise the risk of a price correction, he added.
